1. Item 4: Market and Non-market output
ESTP course - ESA 2010 National Accounts
Luxembourg, 30 May - 3 June Eurostat

2. Market and non-market output
Different approaches to GDP
Production boundary
Valuation
Time of recording
Distinction market/non-market
Output of various industries

3. The output approach to GDP
Intermediate Consumption
Gross Value Added T
Gross Domestic Product
For the next hour or so we are going to talk about production. We will have a look at what activities do count as production and what activities do not count as production in the system of National Accounts. We will also try to get an idea about some of the methods and sources which national accountants use to measure production.
Why is it important to talk about production? Because understanding production is essential for understanding the concept of GVA and GDP. Output is the result of production and GVA is output minus intermediate consumption. So by determining what counts as output (and intermediate consumption) you determine the amount of gross value added recorded by National Accounts.
Taken from this production side approach, GVA results in GDP (by adding taxes less subsidies on products). GDP in turn determines the primary incomes that can be distributed in an economy and the amount of expenditure and investments.
So I will now deal with production and after that Arturo will talk about what happens with the incomes that come out of the production process, how they are distributed, redistributed and spent. S

4. The expenditure approach to GDP
Final consumption expenditure
Gross capital formation
Ex -
GDP Im
The production approach is not the only approach to calculating GDP. Instead of counting the goods and services produced, you could also count the goods and services which are consumed, invested, and exported or imported.
This way of looking at things is called the expenditure approach to GDP and it basically looks like what is shown in this slide.
We will come back to the expenditure approach in detail later in the day after having talked about output and intermediate consumption.
Just to make things complete: there is also an income approach to GDP. The idea behind that approach is that the value added generated in an economy is distributed to those participating in the production process. So by adding compensation of employees (= salaries), operating surplus (=profits) and taxes on production and imports (less subsidies) you also arrive at GDP.

5. The income approach to GDP
For completeness:
GDP = Compensation of employees
+ Taxes minus subsidies on production and imports
+ gross operating surplus

6. Production boundary Production boundary
All production of goods and services under control of an institutional unit
Production boundary
Excludes:
- Natural processes
- Household services
(cleaning, cooking,
caring, etc.)
- Holding gains and
losses
Includes:
own-account production for own final use or gross capital formation
dwelling services of owner-occupiers
employing paid domestic staff
volunteer activities that result in goods
illegal and hidden activities
Production includes
Own-account production for own final use
Own-account production of all goods that are retained by their producers for their own final consumption or gross fixed capital formation.
Own-account production of goods by households: only own-accounts construction of dwellings and the production, storage and processing of agricultural products by households.
Dwelling services of owner-occupiers
Exception from the rule that own-accounts service production by households is excluded from the accounts. Reason: ratio of owner-occupied dwellings can vary significantly between countries, so that international comparisons would be distorted if no imputation were made.
Domestic staff
Domestic and personal services by employing paid domestic staff
Volunteer activities that result in goods
E.g. construction of a dwelling, church or other building - “Barn-raising”.
However, volunteer activities not resulting in goods, e.g. caretaking and cleaning without payment are excluded.
Illegal and hidden activities
E.g. prostitution, smuggling of alcohol and tobacco, production of drugs.
Production excludes
Holding gains and losses
Holding gains accruing on goods held in inventory after they have been produced must not be included in the value of output. Goods withdrawn from inventories to be valued at prices prevailing at time they are withdrawn, not at historic costs.
Natural processes
Processes without any human involvement or direction, e.g. unmanaged growth of fish stocks in international waters. Fish farming, on the other hand is production. Mineral resources: If oil is discovered in Brussels, this is not production - it is added to wealth (and balance sheet) of Belgium without passing through the production accounts.
Household services
Paid services and owner-occupied dwellings included as just explained. However, when domestic and personal services are produced and consumed within the same household, it is not included in production. E.g.: cleaning, cooking, childcare, caring for sick and old people. Famous example: Bachelor marrying his cook or cleaning lady increases GDP.
Reasons for excluding household services
Measurement problems, relative isolation and independence of household services from the markets, adverse effects on the usefulness of the accounts for policy purposes and the analysis of markets and market disequilibria (inflation, unemployment, etc.)
Household Satellite accounts: Some countries have been experimenting with the measurement of household services. But very challenging for data sources and assumptions - so not included in the main system. Incidentally this also means that the consumer durables used (eg. fridges, washing machines) are not considered as capital.

7. P1: Output
Products created during the accounting period (result of production) Output = sales (or other uses of goods and services produced as output) +/- changes in inventories of goods produced as outputs

8. Types of output P11: Market output
P12: Output produced for own final use
P13: Other non-market output
Distinction important:
determines valuation of output
affects classification of units by sector
Same distinctions apply to institutional units and local KAUs

9. P11: Market output Output that is disposed of on the market
sold at economically significant prices
bartered
used for payment in kind
supplied by one local KAU to another within the same institutional unit
added to inventories
Partly defined by reference to unit, partly by comparing costs and sales

10. P12: Output for own final use
Goods and services produced and retained
for final consumption (only by households) or
gross fixed capital formation by the same institutional unit
Own final consumption - examples:
Agricultural products retained by farmers
Housing services produced by owner-occupiers
Houshold services produced by employing paid staff
Own GFCF - examples:
Special machine tools produced by engeneering enterprises
Dwellings, or extensions to dwellings, produced by households
Own-account construction, including communal construction undertaken by groups of households

11. P13: Other non-market output
Goods and services that are provided
by government or non-profit institutions serving households
free or at prices that are not economically significant
This is rather the default category, but you can see that, for example, national defence services would be included here.
It is perfectly possible for some products to be supplied as market output and as non-market output in the same economy
=> ask for example - health and education
Reasons for providing other non-market output:
- market failure or impossible to collect prices for a collective service (defence)
- social or economic policy (e.g. education and health)

12. Distinction market/non-market output
First determine institutional unit:
Private or public producer?
(Public producer is controlled by government)
If private: normally market producers, except private NPIs with sales < 50% of costs
If public: non-market producers when sales < 50% of costs

13. Distinction market/non-market output
Sales = market output (P.11) and payments for non-market output (P.131) Costs = intermediate consumption + compensation of employees + consumption of fixed capital + other taxes on production + net interest charge (cost of capital)

14. Quantitative market-non- market (50%) criterion
Sales excludes payments to cover overall deficit but includes subsidies that are related to output For costs, other subsidies on production are not deducted. Costs made for own-account capital formation are excluded Criterion applied over a range of years Minor fluctuations in the size of sales from one year to another do not require a reclassification of institutional units (and their local KAUs and output) See table 3.1 and paragraphs

15. Valuation market output – basic prices
output for own use – basic prices
non-market output - production costs
inventories - basic prices

16. Time of recording
Accruals for all flows Some flexibility required for e.g. taxes

17. Agriculture, fishing
Output to be recorded as being produced continuously:
Growing crops, standing timber, animals raised for slaughter -> work in progress
Excludes uncultivated biological resources

18. Construction Similarly, output to be recorded continuously:
If contract of sale is made in advance, then output is treated as sold each accounting period rather than work-in-progress
If stage payments are made these can be used to value the output in the accounting period
Otherwise, record work-in-progress

19. Wholesale and retail trade
Output = trade margin = sales price minus replacement price Output = value of sales + value of goods purchased for resale and used for intermediate consumption, compensation of employees in kind or mixed income in kind - value of goods purchased for resale + value of additions to inventories of goods for resale - value of goods withdrawn from inventories of goods for resale - value or recurrent losses due to normal rates of wastage, theft or accidental damage

20. Transportation and storage
Transport services – amounts receivable Storage services – value of additions to work in progress, quality not price increase Travel agency services – fees and commissions of the agency Tour operators – cost of the tour

21. Financial services Paid for directly or indirectly:
Financial services provided for direct payment
bank charges, credit charge charges (annual/transaction)
Financial services paid for through loading interest charges
FISIM – difference between interest paid/received
Financial services in acquiring and disposing of financial assets and liabilities in financial markets
margins on securities

22. Insurance
Financial services provided in insurance and pension schemes, where the activity is financed by loading insurance contributions and from the income return on savings
Output = service charge
Non-life insurance output = total premiums earned + implicit premium supplements (equal to the property income earned on technical reserves) - adjusted claims incurred
Life insurance output = premiums earned + premium supplements - benefits due - increases (plus decreases) in life insurance technical reserves

23. Owner-occupied dwellings
Problem: Variation of house ownership across countries => counting rented houses only would give some countries higher GDP than others Solution: including services of owner-occupied dwellings by assuming that output is equal to the rent that would be paid for the same house or apartment (if it were rented) Methods and sources: Stratification method using data on housing stocks and rents. In some countries sum of costs approach

24. R&D
R&D by specialised commercial research laboratories or institutes is valued at the revenues from sales, contracts, commissions, fees, etc. in the usual way
R&D for use within the same enterprise is valued on the basis of the estimated basic prices that would be paid if the research were subcontracted
R&D by government units, universities, non-profit research institutes is valued as the sum of the costs of production
Output is used as Gross Fixed Capital Formation (see later)

25. Originals and household staff
Entertainment, literary or artistic originals:
Output valued by sales price, production cost or expected returns
Royalties received on the use of the original are produced services
Household staff valued by compensation of employees (cash and in kind)

26. Non-market services Valued at sum of costs:
Intermediate consumption
Compensation of employees
Taxes minus subsidies on production
Consumption of fixed capital
Assume net operating surplus is zero